A complex deal between the state and TransCanada Corp. to spur construction of a multibillion-dollar natural gas pipeline has done little to make the project more commercially viable and could put the state at financial risk, a former state petroleum economist says.
Speaking at an oil industry gathering Thursday in Anchorage, Roger Marks said state leaders made faulty assessments in their quest to land the long-sought pipeline project. At issue is the state's $500 million subsidy and exclusive license to pipeline builder TransCanada -- a deal championed by former Gov. Sarah Palin and approved last year by the Legislature.
In an interview, Alaska Revenue Commissioner Pat Galvin said Marks has it wrong, and that the state's contract with TransCanada is still good for Alaska.
Under the Alaska Gasline Inducement Act, the state is providing TransCanada the subsidies in return for the Calgary-based company to pursue an "open season" in 2010, when it will seek long-term shipping contracts from gas producers. In return, Alaska will receive concessions from TransCanada, including rolled-in tariffs designed to foster new gas exploration and a promise that the company will carry on its pipeline work even if the open season fails.
Marks said AGIA is flawed and the state should cut is losses by pulling out of its contract with TransCanada. He claims the state used faulty reasoning in assessing the potential profits of the estimated $26 billion to $40 billion pipeline project. The state then used those numbers to sell the public on a line owned by a third party, like TransCanada, instead of companies like BP or ConocoPhillips, which hold leases to develop much of the North Slope's natural gas.
Now an independent economist, Marks helped craft the Stranded Gas Development Act under Gov. Tony Knowles and was involved in negotiations with gas producers to build a pipeline under Gov. Frank Murkowski. Marks' analysis of AGIA's shortcomings was published in the September issue of Journal of Economic Issues.
"My main motivation (for speaking against AGIA) was to really come at it as someone chronicling what happened, as an historian, rather than as a call to arms," Marks said in an interview Thursday. "These are issues associated with the act that were really overlooked in the public-review process."
Marks predicts TransCanada's 2010 open season will result only in conditional shipping commitments. That's not unusual; gas producers, TransCanada and the state are clear that any open season bids are likely to be conditional on coming to an agreement on state fiscal terms. Producers have long held that unreliable tax terms kept them from pursuing a pipeline before AGIA was even introduced.
If Alaska reworks its gas tax, as producers may want, the state could be seen as making a producer-owned line more enticing, at the expense of the TransCanada line. That could trigger an AGIA clause that leaves Alaska paying TransCanada treble damages -- three times as much as the company has spent on its pipeline efforts.
Depending on when that happened, Alaska could have to shell out $400 million to $2 billion to TransCanada.
"If the state's having cold feet, it makes sense to move sooner rather than later," Marks said. Damages could rise to $2 billion if a court interprets AGIA to mean gross spending, or $400 million for net spending; either way, no small chunk of change for a state faced with declining oil production, which generates 90 percent of Alaska's general-fund revenue.
Revenue Commissioner Galvin, who helped draft AGIA while with the Palin administration, countered Marks' arguments in an interview Thursday night. For one, Marks "has it flat-out, legally wrong" that the state could face $2 billion in damages if it breaks its deal with TransCanada. Lawyers for the state and TransCanada agree that AGIA calls for damages on a net, not gross, basis.
Gas taxes are a bit trickier. Galvin cited his repeated testimony to the Legislature that any tax discussions with gas producers will include a debate on how such changes might affect Alaska's AGIA obligations.
"The state can provide a change in the fiscal system for the participants in the AGIA project," Galvin said. "The shorthand is, the path to fiscal certainty is through AGIA." Any changes the administration proposes would apply only to producers buying into the AGIA line, Galvin added.
And Marks' claim that the state used faulty accounting?
"What Roger is relying upon is what I refer to as academic accounting or economic analysis," Galvin said. "Every practitioner that we've talked to with regard to project financing has told us that the reasoning he is advocating is not the one that's used in practice."
Two months ago, Galvin said, he sought additional clarification on this issue: "When the project finance folks at Goldman Sachs tell you that this is the way it works, then I believe them."
While AGIA may have been Palin's creation, Gov. Sean Parnell has stood solidly by the plan, even under changing economic conditions, a stream of news accounts detailing massive new shale gas plays in the Lower 48, and low natural gas prices.
What might have worked better? Marks said the state screwed up by demanding too much.
"If you hold out for the perfect deal ... you're going to end up with nothing," he said. "If people want this to happen, embrace imperfection would be my advice."
Contact Rena Delbridge at rena@alaskadispatch.com